RICHARD KOO: Barack Obama's Policies Were The Correct Response To The Recession

Richard Koo, Chief Economist of
Nomura Research Institute, has had a pretty simple and
consistent thesis for years: private sector balance sheets
are plagued by huge debt overhangs, and as they delever, the
government must borrow and spend to prevent a deflationary
spiral.

"Average citizens find it hard to understand why the government
should not balance its budget when households and businesses must
all do so," writes Koo in a new piece for
the Financial Times. "It is risky for politicians to explain
but, until they make it clear that the economy will implode if
everybody is saving and nobody is borrowing, public support for
the necessary fiscal stimulus is likely to weaken, as seen during
the past four years of the Obama administration."

Koo points to the Japanese experience as a case for how cuts go
wrong:

Japan’s attempt in 1997 to reduce its deficit by 3 per cent of
GDP – the same size as the “fiscal cliff” now facing the US – led
to a horrendous 3 per cent drop in GDP and a 68 per cent increase
in the deficit. At that time, Japan’s private sector was saving 6
per cent of GDP at near zero interest rates, just like the US
private sector today. It took Japan 10 years to climb out of the
hole.

"In 2008, Barack Obama told the US people the nation’s economic
crisis would take a long time to overcome," he writes. "In
2012, many of those voters are losing patience, because they have
not been told why this recession has lasted so long or why his
policies were the correct response."

Koo is arguing that, while it may be counterintuitive to many,
Obama is on the right track. People just need to be
patient.